Save Article

Turkish Regulator Probes Currency Trades

Analysts See a Risk to Investor Confidence

Turkey is trying to stabilize its currency amid antigovernment protests and upheaval in emerging markets.
European Pressphoto Agency

By

Emre Peker and

Kerim Karakaya

Updated July 10, 2013 4:52 p.m. ET

ISTANBUL—Turkey started an investigation of foreign-currency transactions, building on a probe of stock trading, as the central bank broadened a fight to shore up the lira, moves analysts say threaten to undermine confidence in the country.

The Banking Regulation and Supervision Agency has asked Turkey's major banks for detailed information on clients who sold the lira on Monday and Tuesday, as well as the sums of money and profit margins involved in the currency trades, three bankers said Wednesday. The BRSA said in an emailed statement that the probe is "routine." The central bank declined to comment.

The probes come as Turkey's central bank is selling record amounts of dollars in daily auctions to counter a slide that has weakened the lira by about 9% in the past two months, a move that makes it one of the worst-performing emerging-market currencies. Analysts say both the intervention and the investigations threaten investors' confidence in Turkey's ability to weather a global selloff in developing economies.

The effort to stabilize markets follows antigovernment protests that roiled Turkey in June, just as international investors were pulling out of emerging markets because of concern that the U.S. Federal Reserve will end easy-money policies that had encouraged investment there.

"Turkey is always a higher risk country than other emerging markets when we talk about portfolio outflows and in a sudden stop, Turkey is always the most vulnerable one," said
Valentina Chen,
who helps manage $4.5 billion of emerging-market debt and currencies at Aviva Investors in London. "With these investigations, I think they're making the situation worse. Turkey is an accident waiting to happen."

Since June 11, when the central bank began auctioning dollars for lira, Turkey has used about 12% of its net foreign-currency reserves. Economist estimate the total has fallen to just above $40 billion. Erdem Basci, governor of the Turkish central bank, has declined to raise interest rates, a tactic countries often use when their currencies are plunging.

The country's Achilles' heel is its chronic current-account deficit, which climbed to $51.3 billion—6.5% of Turkey's $786 billion gross domestic product —in April, a total that exceeds the central bank's net reserves of foreign currency. In 2011, when the deficit grew to 10% of GDP, the currency dropped 20% against the dollar and helped push inflation to double-digit percentages.

On Monday, the lira sank to an all-time low of 1.9736 against the dollar, prompting the central bank to sell the greenback, slightly tightening monetary policy by reducing the amount of the local currency in the market. The central bank sold a record $2.25 billion in seven auctions on Monday, and followed up with another $1.3 billion on Wednesday, but the lira barely budged. It was at 1.9609 to the dollar in late afternoon trading.

"The central bank's firepower…is extremely low by emerging-market standards," said Neil Shearing, chief emerging-markets economist with Capital Economics. "In the end, we suspect the market pressure will win out, particularly given the small size of Turkey's foreign-exchange reserves."

The government, which has been quick to blame speculators for the market rout, seemed to acknowledge this week that broader factors are behind the selloff.

"If the Turkish lira weakness is sustained, it would tend to get inflationary pressure up," Finance Minister
Mehmet Simsek
said Wednesday at a European Policy Centre event in Brussels. "The fallout so far is very limited, but how we move from here is important. The faster Federal Reserve policy normalization is actually…problematic for all emerging markets."

Mr. Simsek said in a message from his official Twitter account that the protests and the prospect that the Fed will scale back its easing efforts were the two causes behind rising borrowing costs in Turkey.

Still, despite the recognition that broader factors are at play, the government continues to investigate traders' actions.

Two weeks ago, the Capital Markets Board, Turkey's securities regulator, launched an investigation into a selloff in stocks in June that caused Turkey's main share index to plummet 24% from a record high on May 22.

Meanwhile, Turkey's two-year borrowing costs have been climbing steadily from an all-time low of 4.79% on May 17, when Moody's Investors Service gave the country a second investment-grade credit rating. Fitch Ratings raised Turkey to investment grade in November.

Yields on benchmark two-year debt rose to 9.25% on Wednesday, the highest level in more than a year.

Prime Minister Recep Tayyip Erdogan has blamed what he calls the "interest-rate lobby" for the protests, saying the unrest is intended to allow investors to profit from Turkey's instability. He has repeatedly warned investors who have sold Turkish assets that the authorities will punish them.

"The recent developments and investigations in Turkey are increasing risk premiums because they leave a mark on investors' memory," said
Suha Yaygin,
a London-based trader at
Toronto Dominion Bank.
"The authorities may call the probes routine, but the market thinks they are using an iron hand in a velvet glove. Turkey's markets are already bracing for a difficult winter—these probes won't help at all."